Page 4 - AfrOil Week 10 2020

AfrOil COMMENTARY AfrOil
The Nigerian government’s oil price predictions for 2020 are probably far too high (Photo: Egoli Oil & Gas)
Nigeria’s oil price problem
Africa’s largest economy is not prepared for oil markets to remain so bearish
WHAT:
The collapse of the OPEC-plus deal highlights the West African state’s vulnerability.
WHY:
Nigeria’s 2020 budget assumes that oil prices will average $57 per barrel.
WHAT NEXT:
In the near term, the country will struggle to find buyers for millions of barrels of crude.
NIGERIA has been Africa’s most populous country for some time, but last year it overtook South Africa to become the continent’s largest economy as well. But it is in a precarious posi- tion, largely because of recent developments on world crude oil markets.
Oil plays a crucial role in the Nigerian econ- omy. It accounts for more than 70% of govern- ment revenues, assuming that the total includes local and state figures as well as federal, and it generates fully 90% of export revenues.
As a result, the country’s financial position is eroded whenever crude prices drop – and they have certainly dropped this year. Both WTI and Brent have plummeted by around $30 per barrel since January 1.
True, markets started the year weak because of a perceived supply glut. But conditions have grown even worse since late January, when it became clear that the coronavirus outbreak was cutting deeply into energy demand in China, the world’s largest importer of crude oil.
In a bind
Last week, the outlook became even grimmer. On March 6, Russia rejected OPEC’s plea for
further output cuts to counter the effects of the virus, thereby dissolving the three-year-old OPEC-plus deal that has been keeping more than 2mn barrels per day (bpd) of production off the market.
Subsequently, crude prices plunged, with WTI dipping below $29 per barrel and Brent below $32 over the weekend. They have regained some ground since then; WTI closed above $35.00 on March 10, while Brent moved above $38.00 on the same day. Even so, the outlook remains uncertain. This uncertainty poses seri- ous problems for Nigeria – and not just because the country’s economy is so heavily dependent on oil, as mentioned above.
The federal government’s budget is based on the assumption that oil prices will average $57 per barrel this year, and this assumption looks absurd in light of the fact that Brent and WTI prices have remained below that threshold since late February and late January respectively.
Moreover, it was already starting to look absurd in mid-December, when Nigerian Pres-
ident Muhammadu Buhari approved the 2020 budget bill that put the breakeven price at $57
per barrel. 
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w w w . N E W S B A S E . c o m Week 10 11•March•2020